Construction-to-Permanent Loan
Construction-to-Perm in Practice
A developer builds a $16,000,000 industrial project with a construction-to-perm loan at 65 percent of cost, $10,400,000. During the 18-month build, the loan funds through draws at a floating rate with interest only. At stabilization the property produces $1,300,000 of NOI, a 12.5 percent debt yield on the $10,400,000 balance, clearing the conversion test. The loan flips to a fixed-rate amortizing permanent mortgage with no new closing, no new appraisal negotiation, and no exposure to a frozen refinance market.
Construction-to-Perm: What the Market Actually Requires
The single-close structure appeals to different lenders for different reasons. Banks use construction-to-perm to keep a relationship borrower through the full lifecycle, typically with recourse during construction that burns down at conversion. Life insurance companies offer some of the cleanest executions for high-quality projects, effectively pairing a construction facility with a forward commitment on the permanent loan, locking permanent terms before ground breaks. HUD's 221(d)(4) program for multifamily is the most complete version of the concept: one closing, construction financing that rolls into a fully amortizing 40-year permanent loan, non-recourse throughout, at the price of a longer approval process and heavier compliance.
The economic heart of the structure is the conversion test. The loan converts when the project delivers a certificate of occupancy and hits an income hurdle, usually a minimum DSCR or debt yield measured on in-place income. Locking the permanent terms at closing is insurance against the refinance market of two years from now: if credit spreads widen or lenders retreat while the building is in lease-up, the takeout already exists. The cost of that insurance is opportunity cost if markets improve, which is why some structures include repricing windows or one-way float-down mechanics worth negotiating hard.
Miss the conversion test and the documents dictate what happens next: extension periods at a fee, a resized permanent loan with a principal paydown to fit the tests, or a cash flow sweep until metrics cure. Sponsors should model conversion at below-pro-forma rents before signing, because the test that looked easy in the pro forma is the one that binds when lease-up runs six months slow.
Why It Matters for Your Loan
Construction lending and permanent lending are two different markets, and the gap between them, the moment a newly delivered building must find takeout debt, is where development deals die in bad markets. A construction-to-permanent structure closes that gap contractually and saves a second round of origination, legal, and title costs. Commercial Lending Solutions arranges single-close executions through banks, life companies, and HUD, and weighs them against a construction loan plus a competitively bid takeout, which sometimes wins when markets are strong.
Related Terms
Construction-to-Perm: FAQ
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